Thursday, October 25, 2012

LLC Operating Agreement: The Basics

Your LLC Operating Agreement is a document kept internally, signed by all members and kept on file with the limited liability company itself. It is not filed with a specific government entity, nor does it have a deadline or due date -- but that doesn't mean it isn't one of the most important documents your LLC has at its disposal.
Sometimes called a Member Control Agreement or an Operating and Member Control Agreement, this document is an important source of guidance and direction for your business, and you cannot afford to overlook this part of your business paperwork.
What is an LLC Operating Agreement?
An LLC Operating Agreement is really the limited liability version of Corporate Bylaws -- it lays out specific direction for various contingencies and processes for the business to follow.
What sort of information must be included in this Agreement?
An operating agreement typically includes the following:
  • Responsibilities and duties of the members and managers
  • Whether management is vested in members, or managing members
  • Rights afforded to those members
  • Specific distribution of profit or loss among the members
  • When and how much members contribute financially to the business
  • How a member will be replaced upon leaving or death
  • How a member can be removed
  • Percentage of members required in order to legally have a membership meeting
  • The amount of money the corporate officers can spend without member approval
  • Method by which members can transfer their ownership interest (like corporate shares) to another entity
Why does my business need an LLC Agreement?
First, because it may be the law; some states require limited liability companies to keep an Operating Agreement on file.
But regardless of whether you're legally required to have an agreement on file, it's crucial that you address those potential instances now, when everyone can agree on what will happen if one member is acting improperly or another passes away.
Without an LLC Operating Agreement, your LLC has no procedures in place for dealing with business actions or inner conflicts, and your business could end up in a legal battle, wasting your hard-earned resources.

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